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Employee Ownership Mindset is a shortcut to your succession planning


Employee Ownership Mindset is a shortcut to your succession planning

By , July 18, 2019
Time is of the essence

Leveraged ESOPs are very popular in other countries, especially the US – this is mainly because the #1 issue with an ESOP (especially for succession) is that they are slow. Employees (normally) lack adequate funding to purchase equity quickly enough for the exiting founder/business owner – and so they need to be set up 7-10 years prior to exit. The best way to accelerate an ESOP is to use leverage (debt) to allow the employees to pay out the owners when they buy equity and then repay the debt over the normal 7-10 year period.

The typical leveraged ESOP model would be –

The founders set up an ESOP and invite key employees to join – thus locking in key staff, reducing risk and providing an exit strategy for owners (Management buy-in through a structured ESOP model).

ESOP is the preferred model as the individual employees do not become direct minority shareholders and the ESOP can include rules as to qualification, entry, valuation, exit, voting rights, control and management which are simply not possible thru direct ownership (which is governed by the Corporations Act) – these rules protect all parties – employees, employer and founders/owners.

Typically, an ESOP uses a profit share model to fund employee buy-in, though employees can and sometimes do contribute – many are not able to contribute substantial funds to buy equity and so either miss out altogether or are left with a very minor fractional ownership.

Introducing leverage solves this problem and typically works as follows:

a) The ESOP (a unit trust with a corporate trustee) borrows the funds required to purchase a substantial amount of equity in the employer entity.

b) Employees agree to repay the loan over a period of 5-7 years, including interest.

c)The lender will hold security over the shares owns by the ESOP, and often a guarantee from the employer and will also accept a personal guarantee from employees.

d) Employees agree that all dividends (and profit share contributions if applicable) are used to repay loans first.

e)The ESOP will normally include a restriction on sale until the loan is repaid – if the employee leaves the business then shares are forfeited (sold) and the loan is repaid – employee receives any surplus.

This model allows the business to attract, retain and motivate key employees whilst having those employees think and act like business owners adding value to the business, reducing risk and providing a viable and timely succession option.


Craig West

Craig West

Executive Chairman | Succession Plus

Craig West is a strategic accountant with over 20 years of experience advising business owners. His background as a CPA in public practice has provided invaluable experience in the key issues of concern to business owners.

In March 2014, Craig was appointed Executive Chairman of the SME Association of Australia, Australia’s largest small business organisation representing over 300,000 business owners.

In October 2014, he was awarded the Exit Planner of the Year at the Exit Planning Institute Annual Conference in Texas, USA, due to his innovative development of an exit planning process to help business owners maximise business value and achieve a successful exit.

Craig’s proprietary structure - a Peak Performance Trust - has won the Australia-wide award for the Employee Share Ownership Plan of the year twice in four years.

In November 2018, Craig launched SME Experts in partnership with Mark Bouris’ Mentored on Podcast One and quickly grew the monthly podcast audience to over 26,500 downloads; in October 2019, he released a new podcast focused on medium-sized businesses - Mid-Market Matters.

In July 2021, Craig joined the NSW Committee for STEP (Society of Trust & Estate Practitioners) – focusing on advising families across generations.

Craig has also launched a SaaS platform, Capitaliz (which captures the 21-step process), to assist other advisers internationally deliver advisory services at scale.

In November 2021, Craig was appointed Executive Chairman of NSW Leaders, a business mentoring group for leading NSW businesses.

In July 2022, Craig West received the award of Doctor of Business Administration for his research thesis titled “Examination of the key factors driving business exit options in Australian Small and Medium Enterprises.”

Craig is passionate about encouraging business owners to think strategically, maximise the value of their business and achieve a successful exit.

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